The draft law on production sharing along with other laws restrictingbusiness opportunities for foreigners in Russia, will likely snuff outthe remaining enthusiasm among foreign investors to do business in Russia- even when it comes to an obviously profitable project.

In the northern Arkhangelsk region, development has started on the Lomonosovdiamond mine. The mine is licensed to Severalmaz until 2018 and the companyplans to carry out the first stage of a five-year plan, which includesa detailed pre-project exploration of two sites in the diamond field. Thedrilling contracts have already been awarded and test drilling is to commencein March 1999.

However, $800 million in investment is needed before commercial miningbegins. Over $650 million of this is for purchase of Russian equipmentand payments to Russian builders and riggers. The majority of investmentis to come from the international
corporation DeBeers - a strategic partner and stockholder of Severalmaz.

The financing should not cause any problems this year. The German Bank,Dresdner, under a DeBeers' guarantee, has already remitted $50 millionto Russia. The management of Severalmaz says DeBeers does not want to investits money into a site in which it owns less than 50 percent (under thelaw about precious metals and stones, foreign investors cannot have 50percent of the shares in the management bodies of diamond producing companies).It is much easier to enforce and litigate on credit agreements rather thanpartnerships and joint ventures should things go sour. It is thereforeno surprise that DeBeers is treading cautiously while lobbying for a changein the law.

The matter majority stake holding was discussed in a meeting betweenprime minister Evgenii Primakov and DeBeers head, Nicolas Oppenhaimer,during the latter's visit to Moscow late last year. Although informationwas scarce about the meeting, apparently Primakov agreed in principle withthe necessity of proposing an amendment to the restrictive law on foreignshareholding. The Finance and Economics ministries, however, did not supportthis idea and the government has yet to take any action.

DeBeers has already arranged about $100 million on the Arkhangelsk project.The money came from a venture capital fund. It is expected DeBeers willnot give up on the idea of making the diamond and precious metals law consistentwith the general law permitting 50 percent foreign participation in miningenterprises. A new law might have to wait for a new president and a newDuma.